Apple Needs More Elon Musk. Tesla Needs More Tim Cook
Should Apple Buy Tesla and Make Elon Musk CEO?
Huh...that’s an interesting question. And it leads to another question, “Why do we ask?”
Because both companies seem to be in desperate need of one another: Apple needs Tesla’s innovative streak and Tesla needs Apple’s cash flow.
Apple has been in the personal device space for many years and Tesla has made a name for itself as the vanguard of innovation in the automation industry. Indeed, their cars are almost like driving an iPad on wheels.
Both companies are focused on user experience, innovation and growing their loyal customer bases. So a merger between the two companies would create a competitive barrier in autonomous vehicles that would make it hard for their competitors to hurdle over.
Furthermore, Elon Musk brings the vision, drive and charisma that Apple lost when Steve Jobs passed away.
We’re not saying that Apple needs a vitamin shot, but there is no other CEO in the industry that can get away with driving an electric semi-truck onto a stage.
But would Apple buying Tesla radically change both companies’ fortunes? Would Tesla benefit from Apple’s deep pockets? And would Elon Musk as CEO lead them to conquer the tech and energy sector?
Apple and Tesla: A Symbiotic Relationship?
Could bringing an efficient cash-rich company (that some believe to have lost its innovative touch) together with one of the most innovative companies of our time (that burns through cash) be a good idea?
Steve Jobs was regarded as one of the most innovative individuals to have ever worked in tech. His untimely passing has left Apple without a truly innovative leader who can see future trends before they appear.
Despite Jobs’ brilliance, he chased and finally convinced Tim Cook to leave his stable job at Compaq and take a risk on Apple in 1998, after Apple lost $1 billion USD in 1997. Tim Cook's more 'structured' background (he has a bachelor’s degree in industrial engineering from Auburn University and an MBA from Duke University) was the perfect complement to Jobs’ creativity.
Cook was responsible for managing worldwide sales and operations, leading the Macintosh division, and managing Apple’s relationships with resellers and suppliers. From then on, Apple has experienced explosive growth as they efficiently produced and sold groundbreaking products, one after the other.
Image credit: Gigaom
Cook’s leadership has been a massive factor to Apple’s success and proves that an innovative mind needs to be complemented with a structured business approach, in order to achieve true success.
And nowhere is that success more apparent than in Apple’s $285.1 billion cash pile (which they could easily use to acquire Tesla, which is valued at $44.95 billion at the time of this article, should they wish).
Indeed, if Tesla were to seek a buyout, there are very few companies that would be able to raise the capital required to purchase it. There is one in a handful of companies that would even consider it. Apple could, and possibly might.
They certainly have the cash to do so. With the new tax laws, Apple will repatriate over $250 billion USD in cash from overseas and pay the new lowered corporate taxes, but will still have plenty of cash left over.
However, if Apple wishes to go through with such a purchase, Tesla shareholders would expect them to pay a premium for their shares; so the final purchase price will be much higher than Tesla’s current value. But still, Apple can afford it.
Despite Cook’s success at Apple, industry experts critique that Apple has lost its innovative streak.
Apple is in Dire Need of Innovation
With Jobs’ untimely passing and Tim Cook taking up the helm at Apple, people are starting to believe Apple has lost its innovative streak as they are producing slightly better iterations of the same old thing.
Image credit: Futurism
What Cook and Apple have excelled at is creating an ecosystem where all their customers’ technological needs are catered for.
Apple may not be the first to venture into the new products they produce (such as Apple Pay, iCloud, Apple watch, Apple Music; and now competing with Amazon on smart speakers and aiming to produce Apple Cars).
But they are able to produce top of the line products that fit seamlessly into their customers’ ecosystem. That unique advantage allows them to capitalize and dominate new trends.
In short, Apple now takes what works and makes it much better and more convenient for their customers.
Innovation is now mostly associated with startups who try to disrupt an industry with a radically new idea before they are bought out by a larger company – a company to help them execute their ideas on a grander scale.
Tesla is one such innovative startup (well, technically not a startup since it was established before 2010 and has been in business for 15 years) that may soon need a buyout to keep their innovative streak going.
Tesla Has Plenty of Innovation but Needs Plenty of Cash to Keep Going
Tesla, on the other hand, is led by Elon Musk – one of the greatest visionaries of our time. He has turned the automaker into one of the most valuable car companies and a leading innovator in sustainable energy.
Elon Musk is focused on the future; some would say too far into the future.
Image credit: Eco News
His ambitious goals have led Tesla to massive success, as they currently possess the leading technology in the electric vehicle market. However, with their current cash burn and production bottleneck, experts and shareholders are beginning to wonder if Musk has bitten off more than he can chew.
The Model 3, Tesla’s mass market vehicle, has 400,000 (mostly unfulfilled) orders and has ran into production issues. Those issues are largely blamed on battery manufacturing hold ups at their Nevada Gigafactory, where an outside supplier (responsible for assembling batteries into modules) failed to deliver as promised.
Image credit: Bloomberg
This hiccup has forced Tesla to do the work themselves, and redo the entire battery assembly process on their own. They are currently aiming to produce 2,500 Model 3 cars per week by the end of March 2018 and double that by the end of June 2018.
Some industry experts believe Tesla is making promises it cannot keep. Producing 2,500 Model 3 cars per week seems to be an overly optimistic goal.
Since Tesla's 2010 IPO at $20 per share, we have seen its stock soar to nearly $400 per share, giving it an astronomical valuation of $60 billion at one point. Early investors have seen massive returns on their capital, but there are many who believe it to be overvalued.
That sentiment has made it one of the most shorted stocks (short selling is borrowing shares of a company to sell, betting that they will lower in value; and buying them back at a lower price before returning the shares to the original owner) in the stock market, dollar wise.
Tesla shorts have collectively lost quite a lot of money in betting on the decline of the company’s value (since the value hasn’t gone down considerably). However, Tesla’s share price surge hasn’t dissuaded all traders who short stock.
Tesla’s need to constantly seek funding, coupled with their Model 3 delays, has lead Moody's to downgrade their credit rating and change its outlook from stable to negative.
Why did Moody’s downgrade Tesla stock?
Because Tesla will soon need to raise more cash to keep expanding at their expected rate.
They had $3.4 billion USD in cash and securities at the end of 2017 and $1.9 billion USD through its asset-based lending facility. Their cash in hand was however deemed inadequate for their 2018 goals.
Moody’s approximates that Tesla needs at least $500 million USD in cash to maintain day-to-day operations, plus an expected cash burn of $2 billion USD if they are to continue their high discretionary capital spending to increase capacity.
They also have a debt maturity of $1.2 billion USD that needs to be paid off through early 2019.
Image credit: Bloomberg
All of this, in consideration with the fact that Tesla cannot produce their Model 3's fast enough, leads Moody’s to believe Tesla needs to raise upwards of $2 billion USD in the near-term.
Tesla’s board of directors recently approved a ten year compensation package for Elon Musk. The all or nothing package is worth $2.6 billion USD at current stock value but could drastically rise if Musk meets 12 other incremental goals set for him. (For each one that he achieves, he will earn stock worth 1 percent of the company’s value).
That means that the board of directors value the company at an astonishing $650 billion in 10 years’ time.
And Musk believes Tesla will be worth more than Apple in the near future, with a projected valuation of $700 billion USD.
This overambitious figure is surprising, even for an over ambitious company like Tesla which burns through $1 billion per quarter, and have not yet turned a full year of net profit despite being in business for 15 years.
Tesla's cash burn could be linked to the fact that it is an innovative company with its sights set on the future. Elon Musk may have some production issues to deal with, but those factors are out of his control.
In fact, those factors are a mark of innovation: innovative companies are more likely to run into unexpected setbacks as they venture into uncharted territory. And Tesla's Model 3 production predicament is a perfect example of what could go wrong.
In order to earn his pay package, Musk will have to meet all 12 goals, or earn nothing. The package was approved to ensure that Musk prioritizes Tesla over his other ventures and does whatever is required to make sure Tesla succeeds.
Elon Musk once joked (or perhaps he was serious) that it would be better if Tesla were a private company to alleviate the pressure of constantly having to push to raise their stock price.
Well, perhaps Tesla would be better off if it were sold to Apple and Musk was made CEO? And Tim Cook could lead operations or perhaps run for office?
Elon Musk’s Innovative Spirit and Tim Cook’s Operations Background Could Launch Both Apple and Tesla into Space
Tim Cook was successfully able to navigate the pitfalls of producing innovative products, due to the fact that he provided a structured road map and did not try to reach too far into the future with each iteration of Apple’s products.
Apple produces great new products with their current technology, and continue to build on it over time.
That strategy may be the key to surviving in an innovative sector: learning to pace oneself so one does not extensively outpace current technology and cause major bugs and issues in their production process.
This brings up the question, what if Tesla continues to spend as much as they do on Research and Development but produce less innovative cars (which are less likely to face production issues) like their competitors do? What if they sell cheaper mass market models, and slowly move towards their future goals?
That type of company would have a resemblance to the current Apple, would it not?
So perhaps Apple could acquire Tesla but retain Cook as the CEO.
If Apple were to acquire Tesla, Tim Cook’s experience with operations and reeling in innovation could help steady the ship by lowering Tesla’s ambition. He could help them produce a more sustainable path to achieving their goals.
A supply chain genius is what Tesla is desperately in need of, and Tim Cook could be the solution. He could help Elon Musk achieve his vision and lower Tesla’s cash burn rate (even though Apple could fund their cash burn rate for years).
Furthermore, Apple is rumored to have started development on their own car project, Project Titan. So acquiring Tesla could bring Project Titan’s 2020 completion target date much closer.
Although it is still unclear what Project Titan really is, Apple’s $1 billion investment in Chinese ride hailing service, Didi Chuxing, proves that they are interested in being in the transportation sector.
Image credit: Business Insider
Even if Apple does not have an interest in buying Tesla, they could be in a good position to partner with Tesla given their technological expertise. Or perhaps they’d prefer to embark on the journey on their own and become a direct rival to Tesla.
At present, if the deal should ever happen, the fact remains that Tesla needs Apple more than Apple needs Tesla.
Plus, not only is Musk responsible for Tesla's success, he is also the CEO of SpaceX; co-founder of OpenAI (a non-profit that researches artificial intelligence); and most recently started The Boring Co. (a tunnel building company). He might just be the hardest working person on the planet.
So he may have too much on his plate to take on the CEO position at Apple. But who knows, it’s Elon Musk we are talking about...a man who does it all with six hours of sleep each night.
Apple is not known to make large acquisitions, with their largest ever being Beats for $3 billion USD in 2014. With the smartphone market reaching maturity and the tablet market shrinking, it is not outlandish to believe they will look for a new area to dominate.
But with the current market valuation of Tesla, it would be hard to justify a purchase even if Apple has more than enough capital to do so.
For now, Apple seems content to use their cash to pay shareholders a dividend, and buy back shares to increase stockholder value.